Optimism Accompanied by Pessimism:The U.S. Economy Cools Down

After the Christmas holidays, the performance of the United States economy is again a focal point. The Hong Kong Economic Journal points out that numbers for the U.S. holiday retails sales are out; not only are they beating expectations, they are on a run. Because of supporting performance numbers, the U.S. stock market is creating new highs. The Dow Jones industrial average (DJIA) is above 11,500 points, the highest since the financial crisis in 2008. The market is quite optimistic and bullish. As the Chinese saying goes, “Fortunes and optimism are usually followed by disaster and pessimism.” Investors should stay alert regarding the rising DJIA, carefully managing investments to avoid huge financial losses.

According to the Master Card Advisors Spending Pulse report, the retail sales number from Nov. 5 to Dec. 24, excluding car sales, is $584 billion, up 5.5 percent from last year, much higher than last year's increase of 4.1 percent and the highest percentage increase since 2005. Apparel and jewelry are having the best sales, increasing 11 percent and 7.2 percent from last year, or tenfold and twofold, respectively, from last year's increase.

The commentary suggests that the optimism is only temporary. Consumers were willing to spend more for their families over the holiday season, but this does not mean it will continue into the next year. After the consumers’ budgets have been expended, they will cut back on spending and return to their normal habits. Most Americans are still living with financial problems. In fact, consumer confidence recovered to 54.3 in November, but slid slightly to 52.5 in a similar survey in December. For a good, healthy U.S. economy, the numbers must be above 90, the number before the decline of the U.S. economy, around December 2007. This fact explains why the current high sales are only temporary and difficult to maintain for the long term. Coincidentally, severe storms on the east coast are also affecting consumer desire to go shopping.

The U.S. stock rally and the economic recovery have no direct correlation. A few economists estimated that in 2011 the U.S. economy will grow at a rate of four percent, the highest in 11 years; however, the major push will come from abroad. Only four percent of the companies in Standard and Poor's 500 have recorded profit this year. Caterpillar, whose stock rose 64 percent this year, recorded a 38 percent revenue growth the first nine months in the Asian-Pacific and a mere 16 percent increase in sales in the United States. DuPont, whose stock rose 48 percent this year, recorded a 50 percent sales growth for the first nine months in the Asian-Pacific and a mere three percent of its total sales was recorded for the United States.

In reality, the housing market, which was the cause of the U.S. financial crisis, is still weak; unemployment is still lingering at a 9.8 percent high. It is difficult to see how the U.S. economy could be recovering at this point. According to the standard poll between September and October, the real estate index in 20 major cities showed a continuous decline that may continue toward the middle of next year. Unemployment is a more severe problem, with an unemployment rate of 9.8 percent (16 million Americans, unemployed). Long-term unemployment accounts for 42 percent of those unemployed (6.3 million people). Because of the extension of unemployment benefits to 99 weeks (until the end of next year), as negotiated between Obama and the Republican Party, the unemployed can continue to hold on; however, a maximum of only 99 weeks of unemployment benefit can be received by any unemployed individual. Furthermore, the unemployment problem won’t be improved with increased earnings from U.S. companies. Caterpillar recruited 16,000 employees this year, with half of them contributed from abroad. According to the Economic Policy Institute in Washington, U.S. corporations created 1.4 million jobs this year, but fewer than 1 million were created domestically. If all jobs were created for Americans, unemployment will drop to 8.9 percent. It is apparent that, even with increased earnings from U.S. corporations and rising stock markets, the U.S. economy is not improving at a strong pace. Except for a small recovery in unemployment, the great performance of U.S. companies does not mean a great improvement in the economy.

It is important to note that U.S. state and local governments are facing huge deficit problems. Some are on the brink of default and will require the federal government to step in. As the deficit continues to widen, it will create a domino effect on all local governments, which, unavoidably, will have to default and create the next round of financial crises.